Economics Homework Help

Question 12

Suppose the (inverse) daily demand for oil is given by , where denotes millions of barrels of oil and is the price per barrel of oil.

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The marginal private cost of extracting oil is given by . Oil extraction gives rise to environmental pollution, such that the marginal social cost of extracting oil is given by .

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• (a)Find the daily production and price of oil if the market for oil extraction is perfectly competitive. [6 marks]
• (b)Find the socially optimal production and price of oil and explain why it differs from the market outcome in (a). [6 marks]
• (c)Find the daily production and price of oil if there is a monopoly oil company and comment on your answer. [6 marks]
• (d) Illustrate your answers to (a), (b) and (c) in one diagram with on the horizontal axis and on the vertical axis. [6 marks]
• (e)Does the monopoly oil company generate a deadweight loss? Is monopoly justified in this market? [6 marks]